Getty Realty Corp. — Q3 2013 Form 10-Q Summary
Business Context and Reporting Period
Getty Realty is a REIT specializing in owning, leasing and financing retail motor fuel and convenience-store properties. The filing covers the three and nine months ended September 30, 2013. At quarter-end, the company owned 891 properties and leased 125 properties from third parties across 21 states and Washington, D.C., with approximately 750 properties under long-term triple-net leases.
The portfolio included approximately 265 transitional properties previously leased to bankrupt Getty Petroleum Marketing Inc. The company continued repositioning, leasing and selling these properties following termination of the Master Lease in April 2012.
Financial Performance and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenues | $29.3 million | $22.3 million | $78.0 million | $74.2 million |
| Operating income | $18.4 million | $5.8 million | $37.9 million | $17.0 million |
| Earnings from continuing operations | $15.3 million | $3.2 million | $29.0 million | $10.4 million |
| Net earnings | $41.9 million | $(3.5) million | $65.0 million | $6.6 million |
| Diluted earnings per share | $1.25 | $(0.10) | $1.94 | $0.20 |
| FFO | $20.6 million | $6.9 million | $40.6 million | $24.3 million |
| AFFO | $18.5 million | $5.4 million | $36.7 million | $21.4 million |
Continuing-operations operating margin was approximately 62.7% in Q3 and 48.7% for the nine-month period, compared with approximately 26.2% and 22.9%, respectively, in the prior-year periods. Net margins were materially distorted by property-disposition gains and recoveries related to Marketing.
- Rental-property revenue was $25.4 million in Q3 and $72.4 million for nine months, compared with $21.6 million and $72.1 million, respectively, in 2012.
- Q3 included $3.1 million of other revenue associated with partial recovery of damages from Marketing’s default under the former Master Lease.
- Environmental expenses were $6.2 million in Q3 and $8.7 million for nine months, compared with $0.2 million in each prior-year comparable period, primarily due to litigation provisions and legal fees.
- Operating cash flow was $38.8 million for the first nine months, up from $12.3 million in 2012.
- Cash and cash equivalents declined to $4.7 million at September 30, 2013 from $16.9 million at December 31, 2012.
- Capital expenditures and property acquisitions totaled $73.4 million, substantially related to acquisitions.
Material Changes Versus the Prior Comparable Period
- Net earnings increased by $45.3 million in Q3 and $58.3 million for nine months, largely because of higher real-estate disposition gains, reversals of Marketing-related bad-debt reserves and lower operating expenses.
- Discontinued operations generated earnings of $26.6 million in Q3 and $35.9 million for nine months, compared with losses of $6.6 million and $3.8 million, respectively, in 2012. Disposition gains were $27.0 million in Q3 and $39.6 million for nine months.
- The company sold 94 properties for approximately $60.9 million during the first nine months and had 131 properties classified as held for sale at September 30, 2013. Twenty-six additional properties were sold after quarter-end for $13.4 million.
- In May 2013, the company acquired 36 gasoline-station and convenience-store properties from Capitol Petroleum Group for $72.5 million, funded with $57.5 million of debt, $11.5 million of 1031-exchange proceeds and cash.
- General and administrative expense declined to $0.9 million for nine months from $25.0 million, primarily because Marketing-related bad-debt expense shifted from a provision to a credit.
- FFO per share increased to $0.62 in Q3 and $1.21 for nine months, from $0.21 and $0.72, respectively. AFFO per share increased to $0.55 and $1.09, from $0.16 and $0.64.
Debt, Liquidity and Dividends
- At September 30, 2013, borrowings consisted of $63.5 million under the senior secured Credit Agreement and a $100.0 million fixed-rate Prudential term loan, for total debt of $163.5 million.
- The Credit Agreement matures in August 2015, with a possible one-year extension, and bears interest based on base rate or LIBOR plus applicable margins. Borrowings outstanding averaged an effective rate of 3.25% at quarter-end.
- The Prudential loan matures in February 2021 and bears fixed interest at 6.00%.
- Management stated that operating needs for the next twelve months were expected to be met through operating cash flow, available credit and cash. Credit facilities remain subject to loan-to-value, leverage, coverage, tangible-net-worth and restricted-payment covenants.
- Cash dividends paid during the first nine months were $17.7 million, or $0.525 per share. The company stated that the quarterly $0.20 per-share dividend was not assured and could be affected by cash flow, debt covenants and other conditions.
Outlook, Commentary, Risks and Unusual Items
- Management expected to continue acquiring properties and pursuing sale-leaseback opportunities, but did not provide quantitative earnings or revenue guidance.
- Repositioning of approximately 265 transitional properties is expected to involve significant costs and lower net revenue than the former Marketing Master Lease. Property expenditures for these assets were $6.7 million during the first nine months.
- The company was pursuing evictions at 42 properties, including 26 Connecticut properties subject to appeals. Management expected a favorable resolution in 2014, but provided no assurance.
- NECG’s financial difficulties resulted in approximately $1.9 million of aggregate bad-debt reserves and a $1.5 million non-cash allowance for deferred rent receivable.
- The Lukoil settlement produced a $25.1 million payment under the Litigation Funding Agreement and a $6.6 million payment satisfying post-petition priority claims. The company may receive further Marketing Estate recoveries, but their amount and timing are uncertain. A portion of the litigation-funding recovery could be subject to federal tax, and the company had requested an IRS ruling.
- Environmental remediation obligations were accrued at $45.2 million at September 30, 2013. Management warned that actual future costs could be substantially higher than recorded amounts.
- The company remained involved in New Jersey MTBE litigation. Plaintiffs had communicated a claim of approximately $24 million against the company, although Getty disputed the proposal. The company stated that additional losses of up to $6 million beyond amounts accrued were possible.
- Other material risks include the Lower Passaic River and Newark Terminal matters, tenant concentration, petroleum-industry volatility, counterparty failures, interest-rate exposure, REIT qualification and the availability of environmental insurance and state reimbursement programs.
Important Facts for Investors to Verify
- Separate recurring rental and AFFO performance from nonrecurring disposition gains, Marketing recoveries, bad-debt reserve reversals and litigation-related items.
- Progress and economics of repositioning, leasing and selling the 265 transitional properties, including vacant properties and ongoing evictions.
- Compliance with Credit Agreement and Prudential loan covenants and the company’s limited $4.7 million cash balance.
- Final tax treatment of the Litigation Funding Agreement proceeds and the outcome of the IRS ruling request.
- Resolution and potential exposure from MTBE litigation, Lower Passaic River claims and other environmental obligations.
- Tenant credit quality and concentration, particularly exposure to CPD NY and NECG.
- Sustainability of the $0.20 quarterly dividend relative to recurring operating cash flow and AFFO.